The European asset-backed commercial paper (ABCP) market should continue to grow strongly in 2003, albeit at a slower pace, after notching up its third consecutive year of high growth in 2002 despite difficult economic conditions and concerns about regulatory changes, says Moody’s Investors Service in its 2002 Review & 2003 Outlook on the market.
Globally, 2002 was a challenging year for ABCP, with total volumes down from the previous year on the back of factors including uncertainty over regulatory changes and a reduced need for working capital finance given the weak economic conditions. However, Moody’s notes that the European ABCP market grew from US$135 billion to an estimated $178 billion during 2002, an increase of 32%.
“Given the context, the strong performance of the European market is a testament to its resilience and investor confidence in its safety. European conduits continue to grow at a quicker pace than their US counterparts and now account for approximately 25% of the total ABCP market,” says Edward Manchester, a Moody’s Vice President/Senior Analyst and author of this report.
In Moody’s opinion, the main factors driving European growth in 2002 were: (i) the purchase of approximately $18 billion of asset-backed securities (ABS) and $11 billion of trade receivables; (ii) the creation of 11 new conduits during the year; (iii) the expansion of the German market by 38%, contributing 46% to the European-wide growth; (iv) the decline of the corporate commercial paper market; (v) an increase in warehousing in anticipation of term ABS; and (vi) the absence of concerns over consolidation, in contrast to the US market.
Credit arbitrage and hybrid programmes were particularly active in 2002, as the volume of ABS financed by European ABCP conduits increased from $51 billion to approximately $69 billion. “Another key feature of the past year has been the increasing popularity of synthetic ABCP programmes as a means of achieving alternative liquidity support, as traditional liquidity facilities become more expensive,” explains Edward Manchester. Euro CP (ECP) volumes also surged 77% during 2002, driven by sponsors’ desire to match fund euro-denominated assets, Moody’s notes. ECP now represents approximately 22% of the European ABCP market (from 18.5% one year ago).
Moody’s predicts another double-digit, though somewhat lower, increase in 2003, driven by factors including the ramping-up of conduits that were established in 2002, an expected significant number of new conduits this year and a plentiful supply of funds available for investment in ABCP.
The proposed changes to the capital adequacy standards of the 1998 Basle Accord are likely to be finally introduced in 2005. Moody’s continues to believe that the European ABCP market will absorb the eventual regulations without too much difficulty. However, as the implementation of the changes draws nearer, the rating agency anticipates the continued use of synthetics and other alternative liquidity structures such as extendible commercial notes (ECNs), as well as a decreased level of risk absorption by liquidity banks.